The Gap, Inc. (GPS) is closing 75 stores in order to save $275 million. The closings will include 53 Old Navy stores and 22 Banana Republic stores, mostly in Japan. When a company is closing underperforming locations as opposed to opening new stores and ramping up growth, it indicates there’s a problem. In Gap’s case, that problem is brand relevance. Not only must it compete with fast-fashion retailers it must also contend with online retailers, where Amazon.com, Inc. (AMZN) dominated the scene with 20% market share in the first quarter.
Gap’s first-quarter numbers were terrible. Revenue came in at $3.44 billion versus an expectation of $3.51 billion. Earnings-per-share were a paltry $0.32. What you really want to pay attention to in retail is comps, which slid 5% for Gap. Breaking that down, Gap Global, Banana Republic Global and Old Navy Global suffered comps declines of 3%, 11% and 6%, respectively. (For more, see: Gap Q1 Profits Decline 47%, Will Close 75 Stores.)
Based on these numbers and what Deutsche Bank deemed low visibility on traffic trends in an investor note, it has lowered its stock price target on GPS to $16 from $17 and maintained a sell rating. GPS closed at $18.41 on May 23. Deutsche Bank also cited downside risks due to market share losses and a likely need for additional inventory markdowns.
While there isn’t much good news here, Gap isn’t going to give up so easily. It has been down before and it also seems to fight back. This time around, the comeback won't involve a distribution deal with Amazon. Gap CEO Art Peck stated on the company’s conference call that he is "in no way previewing a partnership." He conceded though that, “Amazon’s presence in e-commerce in this country is undeniable." (For more, see: Buy or Sell These Troubled Retailers?)
Dan Moskowitz does not have any positions in GPS or AMZN.